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Week 08, Day 4 - Assignment 4 Solutions

# Week 08, Day 4 - Assignment 4 Solutions - ASSIGNMENT#4...

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ASSIGNMENT #4 SOLUTIONS 1. a) Personal income = GDP + TR = \$900 + \$50 = \$950 billion b) Disposable income = personal income – T = GDP + TR – T = \$900 + \$50 - \$120 = \$830 billion c) Private savings (S private ) = disposable income – C = \$830 - \$720 = \$110 billion d) Budget balance or government savings (S government ) = T – G – TR = \$120 - \$160 - \$50 = -\$90 billion A budget deficit of \$90 billion exists. e) National savings (NS) = S private + S government = \$110 + (– \$90) = \$20 billion f) Trade balance = X – IM = \$210 - \$220 = -\$10 billion A trade deficit of \$10 billion exists. g) If a country has a trade deficit, the country must be borrowing more from foreigners and selling more assets to foreigners than it is lending to foreigners and buying from foreigners. Financial capital must be flowing into the country. Capital inflows (KI) = IM – X = \$220 - \$210 = \$10 billion h) GDP = C + I + G + X – IM or Investment spending (I) = GDP – C – G – X + IM = \$900 - \$720 - \$160 - \$210 + \$220 = \$30 billion i) Yes, the savings – investment spending identity holds; total savings equals investment spending.

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